In Arechiga v. Dolores Press, Inc., the California Court of Appeal held that California Labor Code section 515(d) does not outlaw “explicit mutual wage agreements,” by which an employer and employee may agree to a fixed salary, to include both regular wages and overtime compensation at not less than one and one-half times the regular […]

In Arechiga v. Dolores Press, Inc., the California Court of Appeal held that California Labor Code section 515(d) does not outlaw “explicit mutual wage agreements,” by which an employer and employee may agree to a fixed salary, to include both regular wages and overtime compensation at not less than one and one-half times the regular rate. More after the break.

Plaintiff worked for defendant as a janitor. At the time of plaintiff’s hire, the parties orally agreed that he would work eleven hours a day, six days a week for a total of 66 hours per week. Because plaintiff was a non-exempt employee, the parties orally agreed that he would earn 26 hours of overtime each week and be paid a total of $880 a workweek. Defendant also claimed that plaintiff was shown a piece of paper at his hire that this salary was based on an regular hourly rate of $11.14. Over three years after plaintiff began his employment, the parties signed a written employment agreement which stated plaintiff would be paid a salary of $880 a week. Plaintiff was terminated four years later and filed a lawsuit against the defendant claiming defendant engaged in unfair business practices under Business & Professions Code section 17200 et seq. Plaintiff predicated his cause of action on section 515(d) of the California Labor Code which provides that in computing the overtime rate required to be paid to nonexempt full-time salaried employees, “the employee’s hourly rate shall be 1/40th of the employee’s weekly salary.” Plaintiff asserted that his weekly salary of $880 compensated him only for a regular 40-hour workweek and did not include payment for his regularly scheduled 26 hours of overtime. Defendant argued that California’s “explicit mutual wage agreement doctrine” applied which allows an employer and employee to agree to a guaranteed fixed salary so long as the employer pays the employee for all overtime at least one and one-half times the employee’s basic rate. At trial, the court entered judgment for the defendant finding a mutual wage agreement under which plaintiff’s fixed salary of $880 lawfully compensated him for both his regular and overtime work based on an regular hourly wage of $11.14 and an hourly overtime wage of $16.71.

The California Court of Appeal affirmed, holding that Labor Code section 515(d) does not prohibit explicit mutual wage agreements. Under such a wage agreement, it may be agreed before the employee starts working that the employee will be paid a guaranteed salary so long as the employee receives at least one and one-half his basic rate for any hours worked beyond the statutorily workday of eight hours. The Court of Appeal stated that plaintiff’s reliance on the Enforcement Policies and Interpretations Manual of the Division of Labor Standards Enforcement, which states that salaried non-exempt explicit wage agreements are no longer permitted pursuant to section 515(d), was misplaced because the Manual was not adopted in compliance with the Administrative Procedure Act. The Court of Appeal further rejected plaintiff’s argument that the parol evidence rule prohibited defendant from introducing evidence of the parties’ oral agreement. As the meaning of the term “salary” in the written agreement was ambiguous, parol evidence was properly admitted to determine the number of work-hours for which plaintiff earned his salary.

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